When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex ante consumption, ex ante investment, Government spending etc. The rate of increase in ex ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

Which of the following is not one of the components of aggregate demand in the economy ?

Savings

The correct answer is option (2) : Savings

Aggregate demand typically consists of the following components:

• Autonomous Consumption: Consumption expenditure that does not vary with income, such as basic necessities.
• Investment: Expenditure by businesses on capital goods and infrastructure.
• Government Spending: Expenditure by the government on goods and services.
• Net Exports: The difference between exports and imports.

Savings, on the other hand, represents the portion of income that is not consumed and is typically associated with the supply side of the economy (savings are used for investment or other purposes). It is not directly part of aggregate demand because it represents income that is not spent on current consumption or investment.